Fannie Mae’s rollout of Desktop Underwriter® Version 10.1 on July 29, 2017 was more than just a periodic software update. The new release had significant changes that signaled the government-sponsored enterprise’s (GSE) loosening of its mortgage guidelines on several fronts to widen mortgage credit availability for hundreds of thousands of new applicants each year.
The new guidelines affect every applicant in a positive way. Many applicants who didn’t qualify before, now will. Others who did qualify before still do, but with better terms and with greater purchasing power or access to better loans.
The higher allowable debt-to-income ratios, simplified self-employment documentation and easier treatment of disputed trade accounts are far-reaching improvements. But, there were several other new updates that have eased qualifying for a multitude of unique borrower situations too.
Borrowers with student loans, employment offers, multiple financed properties and timeshare mortgage issues all will experience better qualifying.
These vast changes are expected to significantly improve the experience of Americans seeking traditional mortgage financing and increase lenders abilities to approve these loans that will be sold to Fannie Mae.
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Fannie Mae Makes Additional Updates to Major Mortgage Guideline Update
By way of background, Fannie Mae made sweeping changes that expanded the access of conventional financing by:
- Relaxing the DU® risk assessment that will boost the number of applications receiving an Approve/Eligible recommendation with no further changes to the borrowers’ profiles.
- Raising the maximum allowable DTI ratio to 50% from 45% to allow more qualified borrowers with higher DTI ratios.
- Allowing loans with disputed tradelines to close as is if the Approve/Eligible recommendation is achieved.
- Bringing the loan-to-value ratios of adjustable-rate mortgages up to 95%–matching the LTV ratios of fixed-rate mortgage.
- Allowing far more self-employed borrowers to qualify off one year of tax returns (most required 2 years before).
- Allowing the simultaneous verification of self-employment income and base, bonus, overtime and or commission income by tax transcripts and income reports, respectively.
- Waiving the requirement of property appraisals on eligible mortgage transactions to reduce origination costs and eliminate delays.
The latest DU® version adopts changes made in recent months from other Fannie Mae announcements and will be fully aligned with the GSE’s Selling Guide that lenders refer to when making conventional loans that conform to Fannie Mae’s standards.
- Student Loan Solutions
- Employment Offer
- Multiple Financed Properties
- Site Condo Reference
- Treatment of Timeshares
- Properties Listed for Sale in the Previous Six Months
- Truncated Asset Account Numbers
Student Loan Solutions
Fannie Mae has tweaked its previous guidelines to accommodate more mortgage borrowers burdened with student loan debt. This debt has ballooned to $1.4 trillion and only increases the debt-to-income ratio of borrowers and decreases their eligibility for a mortgage loan.
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Against this backdrop, Fannie Mae simplifies how student loan payments are to be included in the calculation of debt-to-income ratios to whichever is lower among these three items: (1) payment shown on credit report, (2) 1% of the outstanding loan balance, or (3) a calculated payment that will fully amortize the loan.
These student loan payments can be excluded from the DTI calculation if the lender can document that another party has made the payments for the past 12 months.
For borrowers who are taking out cash-out refinance loans to pay off their student loans, the loan-level price adjustments will be waived if all requirements have been met. This means that the interest rate on such student loan cash-out refinance will not be higher like standard cash-out refinances, although the standard LTV ratios will apply.
The stress of selling a home, relocating for work, and buying a new home became easier through Fannie Mae’s relaxed rules. There is no need to be on the new job when contractual employment can be verified, and lenders do not need to collect pay stubs prior to delivery of the new mortgage.
You can present your contract offer as proof of employment to help you buy a home and start your new job all at the same time.
Multiple Financed Properties
Fannie Mae limits the number of financed properties that a borrower seeking a mortgage can own or be obligated to 10. Depending on this number, the lender will do a calculation of reserve requirements that can be complicated and confusing.
Consequently, the latest DU® of Fannie Mae simplifies that asset reserve calculation in connection with multiple financed properties and thus clears confusion on many lender’s part by setting forth the specific calculation on asset reserves required.
Site Condo References
Fannie Mae removes project review requirements on site condos, which save borrowers time and money. Project reviews are required by Fannie Mae on condos to protect it from future and unseen issues involving litigation, finances and more.
Nonetheless, site condos are more akin to a planned unit development (PUD) or subdivision. They are single-family detached units whose maintenance on the property and land falls on the owner. The homeowners’ association (HOA) has little to no involvement in site condos. Thus, the need for a review is gratuitous.
Treatment of Timeshares
Fannie Mae updated how debts relating to timeshare properties are to be treated. Previously, timeshare loans showed up on credit reports as mortgage-related debt and the relevant mortgage delinquency requirement would have applied.
Under the latest version of the DU®, debts tied to timeshare properties are considered installment loans. As such, any late payments on timeshare loans will be considered as late payments on an installment loan instead of a mortgage loan.
Properties Listed for Sale in the Previous Six Months
Under the DU® update, Fannie Mae has made it easier for homeowners to do a cash-out refinance by removing restrictions on homes that were listed for sale in the previous six months.
Fannie Mae had previously put a limit to the amount of cash a homeowner could take out of a home that had been listed for sale via the Multiple Listing Service (MLS) in the past six months. Now, Fannie Mae allows for the cash-out refinance to happen simultaneously with the property being taken off the MLS before the new loan’s disbursement date.
Thus, homeowners who opted to refinance instead of selling their home can refinance without a waiting period and will not face penalties for doing such. This basically makes cash-out refinance easier for homeowners.
Truncated Asset Account Numbers
Fannie Mae has fortified the privacy of its borrowers by allowing truncated account numbers to appear on the loan application, in DU®, and on asset documentation.
To protect a borrower’s non-public information, only the last four digits of his/her asset accounts will appear in all the borrower’s files.The use of truncated account numbers in addition to secure portals and electronic signatures will make applying for a mortgage more secure and convenient under the Desktop Underwriter®.
The effect on the number of qualified applicants which these huge underwriting changes will certainly bring to the mortgage industry have yet to be seen and measured. But for now, it’s plain to see that qualifying for mortgages post-Recession has become more accessible for everyone.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.